Slayden v. H. J. Seip Coal Co.
| Decision Date | 11 April 1887 |
| Parties | STOKELEY W. SLAYDEN, Appellant, v. THE H. J. SEIP COAL COMPANY, Respondent. |
| Court | Kansas Court of Appeals |
APPEAL from the Buchanan Circuit Court, HON. JOSEPH P. GRUBB, Judge.
Affirmed.
Statement of case by the court.
The petition in this case contained two counts, but, as the plaintiff dismissed as to the second count, we are confined to the first count of the petition. The plaintiff, a stockholder in the defendant corporation, brought this action to recover his share of a dividend declared by the directors of the corporation, on the seventeenth day of July, 1882.
The answer averred, among other things, in substance the following: " That the plaintiff was, on the seventeenth day of July, 1882, one of the directors of the defendant, and that, on that day, the board of directors of defendant passed the following resolution:
That at the time of the adoption of said resolution, ‘ there were no earned profits of the defendant in the treasury of the corporation subject to a dividend; that all the above-named amount stood upon the books of the corporation charged to profit and loss; that it, in fact, consisted of uncollected and outstanding accounts, and that these facts were well known to plaintiff; ’ that, at said time, the defendant was in an embarrassed condition financially, and has been so ever since; that the outstanding accounts, upon which said resolution was based, proved to be largely uncollectible, and are still outstanding and unpaid; that, on February 27, 1883, defendant borrowed five thousand dollars to carry on its business, and, out of such sum, paid plaintiff one thousand dollars upon the so-called dividend ‘ that, from the date of said payment to the present time, this defendant has been in debt and pressed for money and, since the pendency of this suit, has had to place its property and effects in the hands of a receiver, to pay its debts and wind up its affairs and business." DDDD’
The plaintiff filed a motion to strike out the greater part of the new matter set up in the answer, which motion the court overruled. The plaintiff thereupon filed a motion asking for judgment on the pleadings, and this motion the court denied.
The plaintiff declined to plead further, and judgment on non prosequitur was entered, from which the plaintiff has appealed to this court.
JAMES F. PITT, for the appellant.
I. It has been held that the power of the agents of the company to declare a dividend cannot be investigated in a suit of this description, if this would involve an inquiry into the financial condition of the company; the directors are specially intrusted to make this investigation, and to determine whether or not a dividend should be declared. Morawetz on Corp., sect. 450, note.
II. Even if creditors were seeking to avoid this dividend, coupling the facts in the answer with a charge of insolvency, it is doubtful whether it would be disturbed, or that money paid under it could be reached. There is not disclosed the slightest intention to wrong creditors. Stringer's case, L. R. 4 Ch. 475.
III. As to the power of directors to declare a dividend, all that is required is, that the whole capital, originally contributed by the shareholders, shall be put into the business and kept there; that no part of it shall be taken out again, directly or indirectly, and given back to the shareholders. Morawetz on Corp., sect. 440.
DONIPHAN & REED, for the respondent.
I. Dividends can only be declared out of earned profits. The term dividend means a sum which the corporation sets apart from its profits to be divided among its stockholders. When all liabilities are paid, either out of the gross receipts or out of the net earnings, the remainder is the profit, to go towards dividends. The term profit denotes what remains after defraying every expense, including loans falling due, as well as interest on such loans. Ample support for the foregoing propositions is found in the following authorities: Boone on the Law of Corp., sect. 125; Lockhart v. VanAlstyne, 31 Mich. 76; Ins. Co. v. Page, 17 B. Mon. 440; Scott v. Ins. Co., 7 Paige 198; 6 Paige 486; St. Johns v. Railroad, 10 Blatchf. 271; Morawetz on Priv. Corp., sects. 334, 346; Field on Corp. 121; Karnes v. Railroad, 4 Abb. Pr. (N. S.) 107; People v. Supervisors of Niagara, 4 Hill 20. Within the meaning of the above authorities, this defendant, at the time when it was tricked by the plaintiff into passing this resolution, had no earned profits, out of which dividends could be legally declared; the admitted averments of the answer place this beyond controversy.
II. Even where dividends have been declared by the directors, and received by the stockholders, they may, nevertheless, be reclaimed by the corporation, if they have been illegally declared, under a misapprehension of the right to declare them. Ins. Co. v. Page, 17 B. Mon. (Ky.) 442; Gratz v. Redd, 4 B. Mon. (Ky.) 191. The corporation could then, certainly, defeat an action brought against it by the stockholder for an illegally declared dividend. A recovery, in this case, would be against good conscience and equity. 2 Story's Eq. Jur., sect. 1252; Curran v. State, 15 How. (U. S.) 304; Bartlett v. Drew, 57 N.Y. 487; Hastings v. Drew, 76 N.Y. 9; Rev. Stat., sect. 741.
III. Stockholders are not entitled to any share of the capital stock, nor to any dividend of the profits, until all the debts of the corporation are paid. Field on Corp. 188; Bank v. St. John, 25 Ala. 695. Here it is not only admitted that there were no earned profits, but, also, that the corporation was in financial embarrassment.
IV. It is admitted that plaintiff was the legal adviser of the corporation; that it was his advice and counsel that procured the passage of the resolution declaring the dividend, and that his real purpose in this scheme was to give a fictitious value to his stock, that he might sell it at an advantageous price, and that he accomplished this purpose. This, under the admitted financial embarrassment of the corporation, amounted to a fraud upon the creditors and no court should now help this plaintiff to secure the fruits of it. A declaration of dividends by the...
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